Abstract
• We examine how technological change affects wage inequality in Indonesia. • Indonesia has experienced rising wage inequality since the early 2000s. • Inequality increased after shifts in relative labor demand within and between industries. • International trade and FDI increase demand for skilled workers and skill premium. This study provides empirical evidence of the impact that technological progress has on wage inequality in Indonesia. The share of educated workers and their skill premiums have recently increased. A supply–demand analysis, using labor force survey data during 1990–2009, shows that both the between- and within-industry shifts of labor demand that favored skilled workers contributed to the widening wage inequality since the early 2000s. Evidence from firm-level data in the manufacturing sector indicates that the diffusion of foreign technologies through imports and foreign direct investment caused demand to shift toward more skilled labor and increased wage inequality.
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